Multifamily Real Estate Investing in the U.S. Secondary Markets

EMS:

Hi Jennifer. Thank you so much for being with me today.

Jennifer Hoover:

Thanks for having me, Elana.

EMS:

Absolutely. To kick off the conversation, tell us a little about your firm and how you got to where you are today.

JH:

Yeah, so Highgate Capital Group was founded in 2013. Always have been focused on secondary markets, and as you mentioned in your opening statement, focused on multifamily in those secondary markets. And Highgate was really founded with the goal of going, our motto is skating to where the puck is going and not to where it has been. And so really looking at markets that haven't quite been institutionalized, that have been undercapitalized, really going into those markets and adding real value on management inefficiencies as well as value add improvements to these underserved communities. Since Highgate’s inception in 2013, we have acquired 26 assets, which is just under 5,000 units and just under $670 million in AUM. I joined Highgate in 2017 as a Senior Vice President, and I was brought in to institutionalize the asset management platform. Prior to joining Highgate, I have worked for some of the largest real estate fund advisors in the country, including LaSalle Investment Management, which currently has about $60 billion of AUM across the investment spectrum. I then worked for Capri Capital Group for a number of years working for some of the largest pension funds in the country, including LACERA and Illinois Teachers. And then I joined Stockbridge Capital Group where I worked as an asset manager covering the Midwest and the Southeast. I was introduced to my Partner, now Partner, John Kinzelberg, prior to joining in 2017, and decided to come on as a Partner to the firm in 2020 and then now the COO and overseeing all of the asset management and operations at the Highgate platform.

EMS:

Jennifer, given your focus on multifamily real estate investing, I wanted you to share your overall outlook for the space.

JH:

Yeah, so I think the fundamentals remain, obviously economically, we're in a very interesting time right now with interest rates and where those stand, and obviously that impacts all aspects of real estate, but especially multifamily. So, I do think we are in a very interesting time period, but the fundamentals for multifamily remain extremely strong. People continue to need, we continue to have a housing throughout the U.S. Obviously, there's lots of supply in certain markets, but just generally speaking, there is a housing shortage throughout the U.S. People will continue to need to be able to rent homes as the cost to own becomes out of reach for many. We are seeing obviously with interest rates, not only interest rates, but just with the cost to improve your home, to maintain your home and the overall inflation that we've seen over the last call it 24 to 36 months will just continue to make down payments and maintaining a home just out of reach for many consumers.

So, the need for multifamily housing will continue, and I think the fundamentals for the space remain very strong. As I noted, Highgate specializes in secondary markets, and prior to joining Highgate, again, as I mentioned, I worked for very institutional, highly capitalized groups that were focused on managing money for pension funds, very large endowments and other corporate pension plans. And so typically those groups are focused on what we call primary markets. So investing in the Dallases, the Houstons, LAs, New York's of the world, which continue to be solid markets, but have seen some distress in recent times just because of the pricing escalations that we saw just 24 months ago post pandemic versus Highgate, we are focused on always secondary markets, but in the last seven to eight years, we've been highly focused on the Midwest, and when I say Midwest, I mean markets like Columbus, Cincinnati, Dayton, Detroit, Grand Rapids, are all markets that we love.

We're heavily involved, as I said, throughout Ohio and Michigan and looking to acquire and throughout Wisconsin and Indiana. Again, really taking advantage of the whole concept of we skate to where the puck is going and not to where it has been. So, as far as the Midwest relates, we continue to see very strong rent growth. We continue to see solid occupancy again, because these are markets that historically have been, the properties are owned by mom-and-pop owner operators, so they haven't had that institutional capital, they haven't had that institutional exposure. And so, when we come into these assets, we really bring all of that to the, we really bring our platform to those assets and again, working to find these limited off market opportunities that typically are in highly supply constrained markets throughout the Midwest and also haven't been improved significantly. And what I mean by that is just haven't had a significant amount of capital infused to the clubhouse and to the outdoor kitchen, pool, pet park, all of those sort of things that we bring. And so, in those markets, we really are seeing consistent fundamentals, and we continue to feel very strong about multifamily in the Midwest specifically, just given the opportunity set that's exposed to us.

EMS:

Jennifer, on the other hand, what are some of the greatest challenges you face in your space and why? Yeah,

JH:

I think, again, going back to interest rates, that is historically we have seen some of the most intense cap rate compression that you would've seen over the last few years. And I think with interest rates and where they are, we won't see as much of that going forward. And so, the rubber really, really hit the road for the groups that can really operate their properties, really dig in and figure out what are the management and efficiencies here? How do we operate our properties more efficiently? How do we provide the best services to residents so that they want to continue? It's not only limit our community, but to pay higher rent increases, which is commiserate across the whole community. So, I think the interest rate environment will continue to present some challenges, but I think also with labor being costly, not just in the Midwest but across the country, how do we find efficiencies in pricing? How do we think about labor and talent so that we can obtain the absolute best talent for our communities to make sure they're really driving home that resident experience that we're looking for? So, I would say obviously in addition to interest rates, just dealing with rising cost, particularly as it relates to labor, but just cost in general, we do quite a bit of, as I mentioned, value add improvements to our communities. So, we go in and update areas like the clubhouse, like the pool, add pet parks and outdoor kitchens and things of that nature that quite frankly just haven't been done. And so, the cost of construction has increased significantly over the last 24 to 36 months. So, how do we, we call it the Goldilocks approach, do enough to make sure our residents are satisfied with the product that we're providing, but not overspending, because it's easy to do that in a market where things are quite expensive.

EMS:

Jennifer, to shift gears a bit, ESG has been top of mind for the industry, and I wanted to see how Highgate is addressing this topic.

JH:

So, whenever we purchase a community, we're always very focused. All of our communities utilize agency financing. So, while working with the Fanny or a Fannie Mae or Freddie Mac, they are very focused on the E component of SG. And so we always are overlooking or thinking about underwriting, I'm sorry, exactly what we want to do at communities when we take over, whether that's low flow toilets or low flow aerators and kind, what's the best approach, LED lighting, how do we just continue to be not only environmentally conscious and friendly in that way, but also reducing cost to the community. And then as far as the SG, I think we're always focused on that. I am an African American woman in an industry that is predominantly or very few African American women are in. And so, we're always thinking about the social responsibility that we have here at Highgate.

I am very involved in the Toigo organization, which is how I came into the business. I was a business school student at Emory and was exposed to the Toigo Foundation, which really does give an opportunity to people of color to be exposed to the finance industry. And so, I continue to be very involved in that organization. I'm also very involved in CREW Chicago, which has several diversity initiatives that I'm a part of, just to, again, make sure we're creating that social awareness and really making sure people that aren't typically exposed to the space are getting that exposure. So we do focus quite a bit just internally on the S component and then the governance part, again, just focusing, we tie that a lot into the environmental part, and a lot of that has to do with the reporting and how we compliant we are with our investment opportunities and how we expose our investors to that compliance as well.

EMS:

Jennifer, we've covered a lot of ground today and wanted to see what you have as far as future plans for the firm, or final thoughts you'd like to share with us.

JH:

Yeah, so I think Highgate is in a great place. We have raised our first fund that has been closed out. We raised just over $56 million with seven assets that we've invested in across that platform in six distinct markets, so great success there. We are in the process of fundraising for Fund 2, which is our value fund. We have three assets in that fund, and it's been an interesting fundraising market, but I'm excited that we continue to move forward with our value-add fund vehicles. We've also recently launched a contribution vehicle, which will be used oftentimes because we are buying in the Midwest from what we think of as family-owned assets. A lot of times families will love to sell. They don't want to manage their community anymore. They love to sell it to us, but because of the tax implications just aren't able to.

And so we're really excited to launch this vehicle because we think it will bring us a lot of opportunity to really work with some of the family owned assets that we've come in contact with that they aren't able to sell, but they can contribute this asset to this legacy vehicle. So, that's our latest initiative that we're highly focused on. Obviously continuing with the value funds, continuing with the Midwest focus, but thinking how do we take advantage of, or how do we create vehicles that really do give our potential investors and potential contributors the right sort of vehicle to be a part of.

EMS:

Jennifer, I wanted to thank you so much for sharing your perspective with our listeners.

JH:

Thanks for having me, Elana.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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